This handout picture taken on April 28, 2008 shows production facilities of the German oil firm Wintershall near the Oasis of Jakhira in the Libyan desert.

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Unrest in Libya continues to wreak havoc on world oil markets, with prices soaring and European nations weighing how to offset disruptions in gas and crude imports from the North African country.

As much as a quarter of Libya's oil production is now offline, along with all gas exports, according to reports. Most analysts expect interruptions to increase, especially with Muammar Qaddafi’s threat to blow up energy pipelines.

While analysts agree that global oil and gas supplies are hardly at risk, as Libya accounts for only 2 percent of world oil output, countries like Italy, France, and Spain relied on Libya in 2010 for as much as 22 percent, 16 percent, and 13 percent of total crude consumption, respectively – a supply not easily replaced on short notice. Europe receives over 85 percent of Libya's crude exports.

And that's causing energy planners to reassess the wisdom of counting on North Africa, where southern European governments have invested significantly to decrease dependence on supplies from Russia and Iran, even if Libya’s civil unrest ends with a peaceful resignation of Qadaffi.

Manouchehr Takin, senior petroleum analyst at the London-based Center for Global Energy Studies, suggests yet another way forward. "Security of supply will be enforced with greater urgency," he says. "They will find sources other than North Africa and the Middle East, like Norway and the Arctic.”

Italy, Spain invested big in North Africa

Italy and Spain have bet big on Libya, which holds Africa’s biggest proven reserves, even if its production is the continent’s third-biggest due to years of neglect. Their national energy giants, ENI and Repsol, stayed behind to keep their foot in the door even as US and British companies fled when sanctions were imposed on Libya following the 1988 bombing of a Pan Am jet over Lockerbie, Scotland.

As a result, both Italy and Spain were rewarded when Qaddafi signed his peace with the West after surrendering his nuclear weapons program in 2003. Both countries grew increasingly dependent on Libyan oil and investment there soared. Together, ENI and Repsol account for about a third of the oil output and most of the gas.

Italy, Libya’s former colonial power, is the most exposed by far. Aside from its disproportional dependence on Libyan oil imports, 13 percent of its gas also came from its Mediterranean neighbor in the first 10 months of 2010, according to the International Energy Agency (pdf).

“There are not many places where you can get perfect substitute for Libyan oil,” which is very high quality, says Mr. Franssen at the Washington, D.C.-based Center for Strategic and International Studies. “Europe is trying to diversify as much as it can, but the places they can diversify to are places they don’t want to turn to."

Under the leadership of Prime Minister Silvio Berlusconi, the Libyan-Italian bond, in energy and all fields, deepened in sectors from finance to soccer. Now, Mr. Berlusconi is being harshly criticized back home for his wrong bet.

In Spain’s case, Repsol didn’t significantly increase its exposure to Libya in recent years. But Libya is already Spain’s third-biggest oil supplier, behind Russia and Iran, illustrating how its diversification efforts backfired.

Austria’s OMV is in much worse shape, with 12 percent of its oil production coming from Libya, compared to less than 4 percent of Repsol, according to company reports. Other companies, like Total, BP, Royal Dutch Shell, Statoil, and Gazprom have smaller exposure to Libya.

Aside from supplying Italy, France, and Spain, Libya also provides 23 percent of Ireland’s oil imports, 21 percent of Austria’s, and 11 percent of Portugal’s, according to the January report from the International Energy Agency.

Many scenarios, few choices

Algeria is also a major European oil and gas supplier, and Morocco has a couple of gas pipelines transiting through its territory onto Spain. If Libya’s unrest subsides quickly and Algeria and Morocco are spared any more upheaval, then southern Europe will not be in as much of a rush to find alternatives.

Whatever happens, countries will be less eager to put their money in the region.

“Bottom line is that this is the very definition of a security of supply, of an energy security issue,” says David Kirsch, a market analyst at Washington-based PFC Energy. “The main impact is when do conditions allow the return to normal conditions. It becomes a question of how scenarios play out. If it goes to civil war, of course you will delay any investment plans. Political environment is a critical factor. Companies will reassess and look elsewhere.”

Alternatives are limited though, especially as demand increases in Asia and global surplus capacity decreases, even in Iran and Russia, where the political price is also an issue.